Four metrics to use in Fantasy Fund Manager to win the £10k prize

With a wealth of information available, what should investors hone in on to spot the best stocks?

Fantasy Fund Manager
Investing for the short term requires a different set of skills Credit: TMG

Choosing winning stocks over a short period of time is a very different task to picking long-term winners and investors in the Fantasy Fund Manager competition need to throw out the rulebook.

Longer term investment strategies need to be placed to one side and the focus must be on how to make the most cash to win the three-month competition.

But with a wealth of information available, what should investors hone in on to spot the best stocks before their rivals do? 

Telegraph Money assesses four key metrics used by professional managers to select stocks depending on your investment approach. We have used the stock GlaxoSmithKline as an example in each category to show how the data works.

All the figures are available on Markets Hub, the Telegraph's financial data portal.

Price-to-earnings ratio

Probably the best-known to experienced investors, the price-to-earnings ratio is a measure of value that takes into account the current share price and the earnings made by a company in the previous year. Typically, the higher this ratio is, the more expensive a stock and vice versa.

GSK's key metrics, available on the Telegraph's Markets Hub

An average ratio is anywhere between 14 and 16 times earnings. Anything above this could be considered expensive, while below this could be thought of as cheap.

“Value investors” – those that buy cheap stock in the hopes they will rebound – should pay close attention to the p/e of a company. GlaxoSmithKline has a p/e of 11, making it cheaper than average stock, but only marginally.

Momentum

The moving average convergence divergence (MACD) is a complicated name but a simple tool. In essence the MACD measures the momentum of a stock. If the signal is positive, then it is worth buying.

However, it should be used in conjunction with the relative strength indicator (RSI), which signals if a stock has been overbought. The higher the number, the more overbought a stock is and the less likely that the momentum can continue.

GlaxoSmithKline is currently above the MACD at the time of writing, so would not be worth buying according to this metric, while its RSI is average. Should this number drop, it could indicate that the stock has been oversold and would be worth adding to your portfolio.

GSK's technical levels, available on the Telegraph's Markets Hub

Simple moving average

This indicator compares the moving average of the share price between two different periods. There are two different SMAs available on Markets Hub.

The 20 and 50-week indicators measures short term performance while the 100 and 200-week guide shows longer-term performance. If both are red this indicates that the share price has been falling, a negative sign.

Both Glaxo’s short term and long-term SMAs are negative, suggesting the share price has been falling more recently and that it is on a downward trajectory.

Payout ratio

The final area to look at is dividends. While many companies are unlikely to pay dividends in the next three months, due to the pandemic, knowing whether a company can maintain payouts is crucial.

British stocks have slammed the brakes on dividends to conserve cash and it is possible that there are more cuts to come. Share prices tend to react negatively when a dividend is cut, so avoiding those that will need to stop their payouts could be crucial.

Investors should pay close attention to the payout ratio, which measures how much a company pays out in dividend as a percentage of its earnings. 

GlaxoSmithKline has a yield of 5.7pc, which might entice investors. However, a payout ratio of 63pc is high. It means that three quarters of its earnings are paid out to shareholders. Investors will need to decide whether this is sustainable. 

The Telegraph Fantasy Fund Manager game will run from November 23 2020 to February 19 2021. The winner will receive £10,000 and there will be weekly prizes of £100. Telegraph Media Group employees will not receive any prizes. For full terms and conditions, click here. To play, click here.